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Hello and welcome you are 
listening to Patrick Boyle on 

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Finance, a podcast exploring 
ideas from quantitative finance,

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examining events occurring in 
markets right now and financial 

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history to see what lessons can 
be taken away, including 

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interviews with some of the most
interesting people in the world 

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of finance. 
To learn more about the podcast,

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visit on finance.org. 
The French bank Societe Generale

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has struggled with unauthorized 
trades occurring on their D1 

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trading desk in the past. 
By struggled I mean lost $5.2 

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billion in 2008 and caused Ben 
Bernanke, who we call the Ben 

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Bernanke around here, to cut 
interest rates by 75 basis 

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points, the largest interest 
rate cut in more than 20 years. 

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At the time. 
The rogue trader in question was

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Jerome Curvier who managed to go
unnoticed amassing a $50 billion

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position in Euro stocks futures 
and when Sokchen discovered his 

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unauthorized trades, they 
notified their regulator and 

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quickly began selling the 
position. 

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Markets were quite illiquid at 
the time as the US market was 

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closed for the Martin Luther 
King Day holiday. 

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But U.S. stock futures were 
trading in the overnight market 

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and the selling pressure caused 
S&P futures to trade limit down.

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Newspaper headlines began 
calling today Black Monday, and 

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fears of a worldwide stock 
market crash were so intense 

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that the Federal Reserve held an
extraordinary emergency meeting 

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where it was decided to slash 
interest rates. 

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The Federal Reserve later said 
that they had planned on cutting

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rates anyhow for real economic 
reasons, and that they had just 

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brought the rate cut forward by 
a week to prevent a stock market

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meltdown. 
The futures position that Jerome

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Kerviel had built was far larger
than the bank's entire market 

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cap at the time, which raised 
some eyebrows when Kerviel 

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initially claimed that his 
bosses knew what he was doing in

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court. 
He admitted to exceeding trading

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limits, faking documents and 
entering false data into 

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computers, but said that he was 
really just a cog in a broken 

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machine and innocent. 
In a twisted world, that's often

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the way that I feel, too. 
Kerrville's lawyers described 

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him as a humble young Breton 
passionate about banking and 

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economics, who was corrupted by 
suicidal generale, a pawn in a 

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global frenzy for profit, and 
called for him to be cleared of 

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all charges. 
Jerome was sentenced to five 

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years in prison but only served 
five months. 

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He was briefly the world's 
poorest man, owing the bank $6.3

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billion. 
This was later reduced to $1.1 

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million. 
After being released from 

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prison, Kerviel met with the 
Pope and embarked on a bizarre 

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pilgrimage from Rome to Paris in
a stand against the tyranny of 

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the markets. 
After the Kerviel incident, 

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Salkjan went to great lengths to
improve their risk systems. 

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A $5.2 billion loss does tend to
focus the mind. 

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The bank's new CEO told 
investors last September. 

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That strength is best in class 
risk management and on the 

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strong foundations high 
performance businesses can 

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thrive. 
You can only imagine my surprise

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when I read the Bloomberg 
headline earlier this week. 

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Sock Gen. traders in Asia exit 
after options bets go 

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undetected. 
This problem had once again 

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happened on the bank's D1 desk, 
and according to Bloomberg, the 

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bank's risk systems had failed 
to register complex stock 

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trades. 
Now, first up, I would argue 

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that it's just time to change 
the name of the desk at Salk 

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Jen. 
That way, if another disaster 

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occurs, at least it won't have 
that Groundhog Day feeling. 

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The D1 desk basically does 
boring hedging trades with 

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minuscule margins. 
Maybe rename it the Low Profit 

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arbitrage desk, and it might 
attract a different type of 

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employee. 
You just don't need the type of 

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guy who thinks that he's joined 
an elite Special Forces military

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division trading baskets of 
stocks against an ETF to earn a 

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basis point. 
That's clearly a recipe for 

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disaster. 
Anyhow, according to the 

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article, a pair of traders in 
Hong Kong left Salcgen after the

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bank discovered a batch of risky
bets that went undetected by the

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firm's risk management systems. 
And amusingly, one of them 

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responded to this story 
yesterday with a rant on 

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LinkedIn. 
Now look, before I'm accused of 

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picking a bad photo of Kavish, 
the trader in question, as 

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clickbait from my video 
thumbnail, I didn't dig through 

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his Instagram and find a photo 
of him and his wife's 

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sunglasses. 
This is his LinkedIn profile 

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photo, and if you're hiring, 
he's open to work. 

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Look, it's 2024, and after a 
lockdown in a few years of 

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working from home, this is what 
a professional photo of AVP at 

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an investment bank now looks 
like. 

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And if you're being judgmental, 
that's on you. 

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OK, sure, I might have changed 
the background a bit, but I'm 

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just trying to present him in 
the best possible light. 

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I think he would probably be 
happy with the change anyhow. 

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Bloomberg reports that Kavish 
Kataria, a trader on the bank's 

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D1 desk, departed last year 
along with the head of his team,

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Ken Ng, after an internal review
of transactions on the desk. 

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Bloomberg's sources say that 
while Sokgen didn't lose any 

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money from the transactions, the
trades could have cost the firm 

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hundreds of millions of dollars 
had an intense market downturn 

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occurred. 
Now, normally in situations like

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this, the people accused of 
wrongdoing keep quiet and allow 

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their lawyers to represent them.
But in this situation, Kavish 

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Katara decided, in the style of 
Sam Bankman Freed, to instead 

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present his side of the story on
social media. 

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Who needs lawyers anymore, 
right? 

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In his LinkedIn post, Katara 
writes trading industry is so 

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big, but there are no rules or 
regulations which fight for 

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Trader justice. 
Qatara might be right. 

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And who's better positioned to 
stand up for Trader Justice than

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me defund compliance? 
A Salk Gen. spokesperson told 

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Bloomberg that their strict 
control framework allowed them 

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to identify A1 off trading 
incident in 2023, which didn't 

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generate any impact and LED to 
appropriate mending measures. 

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Qataria wrote on LinkedIn that 
he was being made a scapegoat 

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and said that all of his trades 
were correctly recorded and 

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visible to his supervisors in 
both Hong Kong and Paris. 

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He went on to say instead of 
taking the responsibility of the

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lapse in their risk systems and 
not identifying the trades at 

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the right time, they fired me 
and terminated my contract. 

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In his post, he claims that he 
didn't conceal his trading 

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activity and that all trades 
were booked automatically in the

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bank systems, generating an 
e-mail to others within the firm

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showing the trades had been 
reconciled. 

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Now, at this point, it might 
make sense to quickly go over 

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what the D1 desk at an 
investment bank does. 

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It's a trading desk that's 
possibly more defined by what it

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doesn't do than what it does do.
D1 desks trade financial 

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products, including derivatives 
that are not options. 

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Usually. 
D1 desks are part of the 

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equities division at a bank, and
they deal in baskets of stocks 

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and related derivatives like 
futures and forwards. 

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Conveniently for us. 
SocGen has a page on their 

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website explaining this. 
It says a D1 product is simply a

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product that has a delta of one.
It's therefore a derivative with

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a linear and symmetrical payoff 
profile since it's delta remains

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around one regardless of changes
in the underlying asset. 

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And then to clarify, they say 
it's therefore a product with no

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optionality. 
Now, in his defence on LinkedIn,

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Kataria implies that the reason 
he lost his job is that he 

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traded options on Indian 
indices. 

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You'll note that the definition 
of a D1 desk was that it trades,

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not options. 
Kataria goes on to say this 

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strategy was one of the 
different strategies which I 

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used to run on Indian indices. 
There were some of and right 

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positions as well as index 
options as well as single stock 

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options on Indian indices on 
which risk reporting was done on

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daily basis. 
This clearly tells you that they

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knew options were traded on the 
desk and this was not completely

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new on the desk. 
I won't lie to you, while I am 

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fighting for traitor justice, it
was not easy reading the piece 

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that he wrote on LinkedIn 
because of the grammar, 

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punctuation, spelling errors. 
I don't know who hires these 

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people. 
I'm guessing that oven right 

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positions means overnight 
positions and that risk res 

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porting means risk reporting, 
but I don't want to put words in

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his mouth. 
Maybe not everyone knows this, 

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but if you decide to channel SPF
and defend yourself from 

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accusations of fraud without 
relying on a lawyer, you can 

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still rely on spell check. 
And if every word that you've 

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written is underlined in red, it
means that something's gone 

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wrong. 
Maybe someone's played a trick 

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on you and flipped your keyboard
upside down, which is not a nice

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thing to do to someone who's 
just lost their job. 

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But come on, Kovish, pull 
yourself together. 

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You're a vice president. 
If something happens to the 

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president, you're going to be in
charge. 

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We need to sort this stuff out. 
Anyhow, back to the problem of 

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the Delta shortfall on the D1 
desk. 

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Bloomberg reports that Qataria 
was hired by the Hong Kong 

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office of SoC Gen. in 2021 and 
that he focused on trading 

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Indian shares. 
They say that it's alleged that 

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some of his trades were not 
logged correctly in Sock Jen's 

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back office systems because 
Qataria executed options trades 

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during the day with no overnight
positions and he tended to 

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arrange them for the date when 
the contracts expired. 

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The article says that when 
Sukjan discovered these Indian 

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options trades, they stress 
tested the positions to see how 

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they would have performed in a 
falling market. 

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And the stress tests allegedly 
found that in the most extreme 

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case, they could have 
potentially lost the bank 

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hundreds of millions of dollars,
which is bad. 

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But on the bright side, hundreds
of millions of dollars is way 

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less than the billions of 
dollars lost by Jerome Kerfiel 

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back in 2008. 
So things are moving in the 

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right direction there at Sock 
Gen. 

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According to the Financial 
Times, Qatari is not accused of 

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breaching risk limits on his 
trades, but of trading options 

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on Indian indices, which Sock 
Gen. say he was not supposed to 

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do. 
And risk limits don't just apply

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to position sizes. 
They also apply to which 

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financial instruments a trader 
is authorized to trade. 

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Usually traders are well aware 
of what they're allowed to trade

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and what's off limits. 
In his LinkedIn post, Kataria 

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wrote. 
I would like to ask during all 

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this time there was no one to 
check what has been happening on

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the desk, he went on to say. 
I accept I did trade options on 

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Indian indices and according to 
me it was in my mandate and well

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within the trading limits. 
Now I'm doing my best to fight 

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for traitor justice here, but 
when appealing to authority, 

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according to me I was allowed to
do the trades is not really the 

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best defence. 
You really have to claim that 

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someone up the chain of command 
authorized you to trade 

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financial products that your job
description, D1, specifically 

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says that you don't trade. 
His point that it took months to

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discover these allegedly 
unauthorized trades does raise 

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questions about how good the 
risk systems are at Salk. 

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Gen. 
Matt Levine at Bloomberg wrote 

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about this story yesterday, 
saying that he doesn't have a 

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fully developed theory of D1 
roguishness, but it does seem to

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have a higher than usual 
incidence of roguishness. 

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He says there's something about 
its technicality about the 

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discipline of making money by 
buying and selling almost but 

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not quite identical things that 
might give people ideas, 

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especially at Salk Gen. 
I'm just hoping that given 

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enough time, Matt will come up 
with a unified theory of D1 

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roguishness, as this needs to be
understood better by all of us. 

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In a follow up post on LinkedIn,
Kataria wrote in spite making 

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more than 50 million PL. for the
bank in eight months, I was 

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fired without even paid single 
penny. 

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My previous year bonuses were 
also withheld and I was just 

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paid 7 day salary. 
If I've done the mistake then 

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the entire risk team and other 
bosses are responsible for the 

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same. 
For not identifying my trades, a

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commenter on his LinkedIn post 
asked him if trading options on 

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the D1 desk was actually part of
his mandate and he replied 

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According to me it was and if 
the same was not then it should 

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have been stopped on day one 
rather than taking more than 

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four months to detect. 
To the same there were trades 

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which were booked overnight and 
the risk was reported on those 

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trades. 
They were only not able to 

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capture the risk on intraday 
trades. 

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Now once again, I'm not entirely
sure what any of that means. 

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Grammar, punctuation and 
spelling do matter. 

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But I think what he's saying is 
according to me, it was within 

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my mandate and I'm innocent 
because I wasn't caught right 

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00:15:20,040 --> 00:15:22,080
away. 
I'm not sure though. 

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It's difficult to interpret this
and that's why people often use 

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lawyers, or at the very least 
spell check. 

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00:15:28,640 --> 00:15:32,920
Kataria claims in his LinkedIn 
post that he had made $50 

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00:15:32,920 --> 00:15:37,680
million for the bank in eight 
months and says my previous year

236
00:15:37,680 --> 00:15:42,920
bonuses were also withheld and I
was just paid seven days salary.

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00:15:43,280 --> 00:15:47,560
This is often how things work at
banks, where a lot of your bonus

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00:15:47,560 --> 00:15:51,800
compensation is withheld and can
be clawed back if you make big 

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00:15:51,800 --> 00:15:55,600
losses at some point in the 
future, or if you're let go for 

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00:15:55,600 --> 00:15:58,680
a gross misconduct. 
There's an argument that if a 

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00:15:58,680 --> 00:16:02,680
trader makes an honest mistake 
and steps outside their mandate,

242
00:16:02,880 --> 00:16:06,360
their manager could just take 
them aside, explain the problem,

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00:16:06,560 --> 00:16:08,680
and give them a warning and move
on. 

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00:16:09,000 --> 00:16:12,320
On the other hand, if that 
mistake involved breaking the 

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00:16:12,320 --> 00:16:15,560
rules and risking hundreds of 
millions of dollars to make 

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00:16:15,560 --> 00:16:20,280
$2,000,000, it might imply that 
you're not very good at your job

247
00:16:20,440 --> 00:16:23,920
of weighing risk in return, and 
that could be grounds for 

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00:16:23,920 --> 00:16:26,840
dismissal. 
We don't actually know many of 

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00:16:26,840 --> 00:16:30,200
the details of what happened. 
Everything that's in the press 

250
00:16:30,200 --> 00:16:35,080
is hearsay and a person is 
innocent until proven guilty. 

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00:16:35,560 --> 00:16:39,280
Salk Gen. reported earnings this
morning which were not as bad as

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00:16:39,280 --> 00:16:43,520
expected, and the CEO told the 
press that the unauthorized 

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00:16:43,520 --> 00:16:47,280
trading in Hong Kong had no 
impact on the group or its 

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00:16:47,280 --> 00:16:51,600
clients and was detected in the 
due course of things by the 

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00:16:51,600 --> 00:16:55,240
bank's control systems, which 
were shown to be effective. 

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00:16:55,720 --> 00:16:58,200
Thanks for tuning into this 
week's podcast. 

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00:16:58,320 --> 00:17:01,520
If you enjoyed it, do send a 
link to one of your friends who 

258
00:17:01,520 --> 00:17:04,880
might enjoy it too, as that's 
how podcasts grow. 

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00:17:05,079 --> 00:17:07,720
Have a great week and talk to 
you again soon. 

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00:17:07,800 --> 00:17:11,000
Bye. 
If you enjoyed this episode, be 

261
00:17:11,000 --> 00:17:13,880
sure to subscribe so you're 
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262
00:17:13,880 --> 00:17:16,119
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00:17:16,119 --> 00:17:18,200
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264
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265
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266
00:17:26,000 --> 00:17:29,160
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Bye.